Some have begun talking about a budding turnaround story in Brazil. What does the deal pipeline look like there? In terms of sectors, are we seeing any driving issuances more than others?
The deal pipeline is certainly looking much healthier than many people think. Some of the country’s top names have hit the market recently including Suzano, Vale, Cosan, Eldorado, Marfrig, and paying concessions of between 20-35-40bp, which isn’t too significant considering the level of political volatility and economic risk. The market for Brazil opened more quickly than most observers had expected, which is encouraging. But I would temper that by saying that the number of issuers for whom pricing is going to make sense right now – because the Brazil debt complex continues to be negatively impacted by the Brazilian macro environment – and who are comfortable taking on dollar-denominated debt is still relatively small. We’re really still just looking at exporters thus far. While in the near term the sectors where I see more deals getting done are agriculture, pulp & paper, and beef, we are also seeing some infrastructure players looking more carefully at the USD market given domestic credit constraints and the continued thirst for yield by global investors.
Have you seen any broad shifts in the funding strategies these corporates are taking given the prolonged nature of the volatility?
Those companies that are able to access the loan market and like the idea of doing pre-payable financing to get them through the rough patch are likely to do so before having to lock in a comparatively high fixed rate coupon, given the difficult macro conditions in Brazil. Having said that, many of the larger corporates in the country already have a fair amount of exposure to both domestic and international banks, and the terms available are going to be much shorter in the bank market than what is available from the capital markets. Ultimately, that trade-off between cost and tenor is one of the things that CFOs or treasurers have to balance, and it isn’t always clear which way to go. It would be great to get two to four-year money that can be pre-paid without a penalty; but when the international bond market starts to look more attractive despite what will be likely be a long and difficult period of econonmic recovery in Brazil, is there a benefit for companies to lock in five or ten-year money without amortization? This is the debate. And if a capital markets window opens up, allowing you to repay some of your banks with longer-term capital market funding, thus freeing up lending capacity , it certainly makes sense to do so.
In terms of local borrowing, we have seen a number of agricultural and real estate firms make use of securitisations, CRIs and CRAs, and they have been very successful in attracting local investors given the substantial tax incentives in place for those picking up that kind of paper. But as those instruments don’t offer the same kind of tax incentives to foreign investors and lack secondary market liquidity, their appeal is largely limited to investors within Brazil.
What are you hearing from borrowers on the ground there?
Most corporates in the top end of the range don’t have immediate liquidity needs, or still have their immediate liquidity needs met through local bank markets or lending, so you don’t get a sense of anxiety; but at the same time, as market conditions remain favourable, even companies not under immediate pressure to go to market are seeing the benefit to extend the tenor of their capital structure, even at a cost that seems expensive relative to what could have been done two years ago. Three months ago, we would talk to people and most were saying they didn’t like the pricing at the time, but pricing has moved very strongly in a more positive direction since then.
At the same time, investors have been encouraged by a confluence of factors. The political situation seems to be moving in the right direction, with impeachment proceedings against Dilma Rousseff moving forward to what seems like an inescapable conclusion; commodity prices have stabilized; and in the background, you have the Federal Reserve pushing the prospect of a rate rise ever farther into the distance. Persistently and historically low developed market yields are making EMs – Brazil among others – that much more attractive.
Moving forward, where do you see some of the bigger opportunities or funding gaps in the country?
There is immense need for infrastructure financing in Brazil. But because most of the infrastructure projects in the country are based on local currency revenues, there has been a very deep reluctance to raise long-term dollar debt because it would be costly to hedge. There was some discussion several years back about creating tax advantaged infrastructure debentures that could be sold offshore, but it never got off the ground. With some of the country’s development banks as well as private sector banks scaling back in their provision of credit, however, we are starting to see infrastructure companies faced with little choice but to consider longer-term dollar debt for at least part of their overall capital needs. This will create very interesting opportunities going forward, but will also put a premium on creativity to find the right balance between currency and refinancing risk to allow these infrastructure projects to move forward.